Machtinger v. R., 98 D.T.C. 1718, [1998] 2 C.T.C. 3068

Mogan T.C.J.:

1 On April 30, 1990, the Appellant's husband transferred certain property to her. The aggregate of all amounts which the husband was liable to pay under the Income Tax Act in respect of 1990 or any preceding taxation year was $39,304.25. By notice of assessment dated June 28, 1991, the Minister of National Revenue invoked subsection 160(1) of the Act to assess the amount of $39,304.25 against the Appellant as the transferee of the property referred to above. The relevant words in subsection 160(1) as they applied to 1990 were as follows:

160(1)

Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a) his spouse or a person who has since become his spouse,

(b) a person who was under 18 years of age, or

(c) a person with whom he was not dealing at arm's length,

the following rules apply:

(d) ...

(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and

(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

2 The Appellant does not dispute the fact that her husband was liable to pay the amount of $39,304.25 at all relevant times. Rather, the Appellant argues (i) that she and her husband were in fact at arm's length in the special circumstances of April 1990 when they agreed to the transfer; and (ii) that the fair market value of the property was less than that assumed by the Minister when issuing the assessment.

3 The Appellant and her husband have had a very rocky marriage. They were married on October 11, 1981. Their first separation occurred from December 1985 to July 1988 when the Appellant was on welfare with two small children. They lived together again from July 1988 to April 1990. They separated briefly from April to May 1990. They were together again from May 1990 to June 1994 during a period when the husband had bypass heart surgery and the Appellant helped to nurse him back to health. They separated from June to September 1994. They were together again from September 1994 to May 8, 1997 but the Appellant stated that they separated on May 8, 1997 “for the final time”. Apparently, the husband gave some serious trouble to the Appellant in the summer of 1997 because she stated in evidence at the hearing (February 1998) that the Ontario Court had imposed a one-year peace bond on the husband which would expire on September 4, 1998. Exhibit A-2 is a copy of the peace bond.

4 It was during the brief separation from April to May 1990 that the property was transferred. The Appellant and her husband had moved into 117 Thornridge Drive in November 1989. It was their family home. When they separated in April 1990 (just five months after moving in), the Appellant was desperate to obtain some security in case there should be future marriage problems. According to her unchallenged evidence, she asked her husband to transfer to her his one-half interest in the family home in April 1990 while they were separated. She said that it was a condition she imposed before cohabiting with him again because she wanted some kind of security in case they should separate again.

5 Exhibit R-11 is a copy of a Transfer/Deed of Land dated April 30, 1990 in which the Appellant's husband transferred to her all of his interest in the family home at 117 Thornridge Drive, Thornhill (legally, the City of Vaughn). The Transfer/Deed of Land shows a nominal consideration of $2.00. The Affidavit of Value and Consideration attached to the Deed/Transfer of Land and forming part of Exhibit R-11 states that the consideration is nominal because it is a transfer from husband to wife for natural love and affection. Exhibit R-11 was registered on May 4, 1990. Soon thereafter, the Appellant and her husband commenced cohabiting again.

6 Exhibit R-19 is an eight-page Marriage Contract also dated April 30 between the Appellant and her husband. The Appellant stated that she insisted upon this contract (each spouse with independent legal advice) because her marriage was so rocky that she was sure that they would separate again and she wanted to know where she stood. Exhibit R-19 refers to 117 Thornridge Drive as the “family residence”. The most relevant parts of Exhibit R-19 are paragraph 8 and subparagraph 10(1) which state:

8. No Support After Breakdown of Marriage

(1) If there is a breakdown of the marriage, each party releases the other to the fullest extent permitted by law and equity from any and all claims, demands or causes of action which they have had, now have or may hereafter have against the other for interim, permanent or lump sum support or maintenance from the other under the Divorce Act or the Family Law Act.

(2) The parties acknowledge and realize that their respective financial circumstances may change in the future, both while cohabiting and after a breakdown of the marriage, by reason of their health, the cost of living, their employment and otherwise. No such change, no matter how unexpected, unforeseeable or catastrophic, will give either party the right to claim support, interim support, maintenance or interim alimony pursuant to the Divorce Act or the Family Law Act from the other.

10. Family Residence

(1) In consideration of the mutual release in respect of spousal support obligations, Marek agrees, immediately following the execution of this contract, to transfer his undivided one-half interest in the family residence to Dora.

7 There was no evidence before me as to the relative net worth or financial position (wealth, poverty, etc.) of the Appellant and her husband on April 30, 1990 when they signed Exhibit R-19 and when he transferred his one-half interest in the family residence. Therefore, I cannot place any value on the “mutual release” referred to in subparagraph 10(1) above. Having regard to his transfer of his one-half interest in the family residence, I propose to take Exhibit R-11 at face value and hold that the consideration was a nominal $2.00 or natural love and affection.

8 In my opinion, the Appellant did not grant, convey or transfer to her husband on or about April 30, 1990 any consideration to which I can attach any value for the purpose of concluding that he received value for the transfer of his one-half interest in the family residence. Accordingly, I hold that his transfer of his one-half interest in 117 Thornridge Drive on April 30, 1990 was a transfer without monetary consideration.

9 The Appellant argued that because of her turbulent marriage, prior separation, and brief separation in April-May, 1990 when she insisted upon the Marriage Contract (Exhibit R-19) and house transfer (Exhibit R-11), she was at arm's length with her husband in late April 1990 when he transferred his one-half interest in the family home. Whether two persons are at arm's length is determined by section 251 of the Income Tax Act which states:

251(1) For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm's length; and

(b) it is a question of fact whether persons not related to each other were at a particular time dealing with each other at arm's length.

251(2) For the purpose of this Act“related persons”, or persons related to each other, are

(a) individuals connected by blood relationship, marriage or adoption;

251(6) For the purposes of this Act,

(b) persons are connected by marriage if one is married to the other or to a person who is so connected by blood relationship to the other; ...

10 The only remaining issue is the value of 117 Thornridge Drive (referred to hereafter as “the Home”) as of April 30, 1990. Before reviewing the evidence as to value, I note from the Respondent's pleading that, when assessing the Appellant, the Minister of National Revenue assumed that the value of all encumbrances on the Home as at April 30, 1990 was not greater than $295,773.96. There was no evidence to contradict that assumption. In fact, the Appellant claims on page two of her Notice of Appeal that, when she sold the Home in November 1991, she was left with only $6,029.28 after paying off the mortgage and closing costs. Exhibits R-6, R-10 and R-12 prove that the Home was sold on November 26, 1991 at a price of $340,000. Exhibit R-7 is a Statement of Account from the Appellant's lawyer who acted for her on the sale, and that exhibit shows net proceeds to the Appellant of $6,029.28. The Minister's assumption with respect to encumbrances not exceeding $295,773.96 was not only not contradicted but, in my opinion, encumbrances in that aggregate range were corroborated by Exhibits R-6, R-7, R-10 and R-11 referred to above. It is clear from these exhibits that the Home was sold in an arm's length transaction in November 1991 for $340,000. The remaining question is to determine the fair market value of the Home on April 30, 1990 when the husband transferred his one-half interest to the Appellant.

11 The Respondent called A.J. Eustace as an expert witness qualified to state an opinion on the fair market value of real property. Mr. Eustace's appraisal report was entered as Exhibit R-21. In his report, Mr. Eustace stated his opinion at page 20 that the fair market value of the Home as at May 4, 1990 was $565,000. If I were to accept the opinion of Mr. Eustace with respect to the fair market value, and if I conclude that the encumbrances on the Home as at May 4, 1990 were $296,000 (rounded), then the equity of the Appellant and her husband in the Home on May 4, 1990 would be $269,000 ($565,000 minus $296,000). The husband's one-half interest in that equity would be $134,500 and that amount is far in excess of the husband's tax liability of $39,304.25. (See paragraphs 1 and 2 above).

12 The Appellant called Randy Cohen as a witness with special knowledge of real property values in the Thornhill area of Metropolitan Toronto. Mr. Cohen is not a member of a professional appraisal institute, and his status as an expert witness was challenged by counsel for the Respondent. Although Mr. Cohen does not have the desirable professional qualifications of an expert appraiser (and there was no evidence that he had taken any courses of study in appraising), I permitted him to express his opinion on the strength of his own sworn statement that, as a licensed real estate agent, he has sold many properties in the area of the subject property between 1987 and the present time; and he is among the top handful of agents selling real estate in this area of Thornhill.

13 Exhibit A-1 is an affidavit sworn by Randy Cohen on January 15, 1998 about 35 days before the hearing of this appeal. The affidavit is a short document of only three pages in which Mr. Cohen stated his qualification as a licensed real estate broker specializing in the Thornhill area; he commented on the six properties which Mr. Eustace relied on as comparable sales; and he stated his opinion that the fair market value of the Home as of May 1990 was in the range of $380,000. If I were to accept the opinion of Mr. Cohen with respect to the fair market value, and if I conclude that the encumbrances on the Home as at May 4, 1990 were $296,000, then the equity of the Appellant and her husband in the Home on May 4, 1990 would be $84,000 ($380,000 minus $296,000). The husband's one-half interest in that equity would be $42,000 and that amount exceeds the husband's tax liability of $39,304.25 at the relevant time.

14 The only evidence with respect to fair market value was provided by Mr. Eustace and Mr. Cohen. If I were required to determine the fair market value of the Home on April 30 or May 4, 1990, I would conclude that the fair market value was some amount between $380,000 and $565,000. I do not put as much weight on Mr. Cohen's opinion as on the opinion of Mr. Eustace because Mr. Cohen does not have appraisal qualifications and he did not provide adequate information for his own selected comparable sales. I do not accept Mr. Eustace's opinion because (i) on page 20 of Exhibit R-21 he refers to “adjustments for time, location, site area, frontage, etc.” but he does not disclose what those adjustments are; (ii) he does not say which one or more of his six comparable sales he regards as the best; and (iii) he does not show how he proceeds from his best comparable sales to his final opinion as to value.

15 Having regard to the opinions expressed by Mr. Eustace and Mr. Cohen, I am not required to determine fair market value. Even if I were to accept without qualification the opinion of the Appellant's witness, Mr. Cohen, that the fair market value of the Home at the relevant time was $380,000 (and I do not accept such opinion), the equity of the Appellant and her husband in the Home would be $84,000 (as stated above) and the value of the husband's equity would be $42,000. That amount is more than sufficient to justify the assessment under appeal. The appeal is dismissed with costs.